Recession and nobody noticed?

Oil and economics update.

Oil has bounced around, and we're back in the land of volatility.  December (Christmas) spending was down, far more than expected, and Nov was adjusted down, so of course the market shot down.  Surprising, oil was up -- probably some people moving money out of stocks pushed it up, and short covering helped.

A few days back I observed "either the world is in a major recession and doesn't know it, or we suddenly have more than 4Mbpd of spare oil capacity, or oil is oversold".   I'm thinking that at least part of it is indeed weaker than visible economics, at least in the west. 

Part of this drop is due to cheap oil -- oil or gasoline spending counts just like eating out or buying gifts, so cheaper oil all by itself is a hit to spending.  Of course some will spend their savings, and indeed food and beverage was up a bit.  Other spending was down, though.   But isn't cheap oil good, you ask?  Well, it will help individual households a bit, but in the short term people save a bit or pay off a bill or two, and it takes a while for cheaper oil to percolate through business costs to make other areas cheaper...and that reduces spending too....and it takes longer for that to turn into more buying and a stronger economy.   But then, the dollar is also strengthening, and that makes it easier to import but harder to export, so that part of the economy slows for a while, while the import part expands.  And of course, if you're in the oil patch or any of the business areas associated with it, you aren't spending more at all!

Is it a net positive or negative for the US?  It'll be positive for the coasts, and a negative for the energy states.  Investors will take a bath, as most of the recent capex growth in the US has been in oil.  Housing and jobs will take a hit for a while.  Overall, the current account deficit will drop as import value goes down for oil, but it should be made up in material imports.  Importers will do well, and exporters will struggle a bit more.  Tanker rates should drop a bit, while other shipping may go up a bit.

Sure enough, container shipping is up from the recent low, and that indicates some recovery in China and maybe India, and perhaps a little more importing to the US.  Since China and India import a higher fraction of their oil (less total, but a higher percentage), they'll benefit a bit more than the US from the cuts.  Of course they'll have the same economic hit from lower price, as will the entire world.  Unfortunately, most of the world was already teetering along with low inflation, so a cut to spending can tip across to recession, and a little follow-through to prices can turn into deflation.  All that needs to happen then is for people to pocket their savings while waiting for prices to drop a bit more, and a deflationary spiral can start.  With heavy gov't and individual debt, debt to GDP will then automatically go up, and EU rules and credit agencies will start hammering on the weaker countries. 

How does all of this play out?  I don't know, other than volatility and uncertainty, but I think the world is at high risk of contagion and a broader market collapse.  A slower drop in oil would have helped, and hopefully production cuts back fast enough to moderate prices until economies can digest the savings as stimulus versus deflation.

In other news, floating storage is up to 25Mbbl leased (likely not all full, yet), and US storage is up a few Mbbl since last week.  Rig activity is now below a year ago, and it can quickly roll back to the lows of '09 since we don't have rising nat gas prices to stimulate a transition from oil to gas like we had from dry gas to wet plays as gas dropped and oil rose in recent years.  It'll just get bad faster this time.

How long will prices be low?  Best bet is to watch storage build.  If production doesn't drop by the time China fills their SPR, Cushing fills up, and floating storage is loaded, we'll see a harsh new low.  If production drops and economies recover, then prices should recover to 65+.  Neither can happen quickly, so we're in for a half-year slog of market volatility, at best.